I was surprised to hear that when Fannie Mae was created in 1938 as a federal agency, a part of her mission was to move money. At the time, because of the 1927 McFadden Act, interstate banking was prohibited. As a result, there could be (and was) insufficient money for mortgages in California and too much unused mortgage money on the East Coast. By buying mortgages from banks and brokers, Fannie Mae was able to move money to areas that needed it. Meanwhile, by selling the mortgages she purchased, she could attract funding from the areas that had it to lend.
Fundamentally, Fannie Mae was supposed to help people buy homes. During the 1930s, she made 30 year mortgages more common when 5 year mortgages were the norm. Yes, she typically required a 20% deposit and strict credit guidelines but she guaranteed the mortgages that she purchased. She let people live the American Dream.
30 years later, everything changed. In 1968, under President Johnson, Fannie Mae became a private corporation but retained a connection with government as a GSE (government sponsored enterprise). No longer a federal agency, she was a profit seeking business with stockholders. Still though, the federal government implicitly guaranteed the mortgages she purchased.
As a result, especially since 2003, when Congress asked her to assist the effort to extend home ownership, Fannie Mae reduced her credit requirements. Initially, profits and home ownership soared but both depended on home prices rising. When prices started to fall, recipients of NINJA mortgages (No Income, No Job or Assets) and 3% down payment mortgages defaulted. The result? The government’s implicit guarantee has become an $84 billion dollar bailout reality.
The Economic Lesson
Arthur Okun’s Equality and Efficiency:The Big Tradeoff (Brookings, 1975) discusses the tension between our democratic heritage and our economic aspirations. Equality implies a smaller economic pie while with efficiency we get a bigger pie and more individual wealth and power.
Do you support the smaller pie that would accompany a government that facilitates widespread home ownership?